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August 11, 2008

The Hidden Benefits of Electric Vehicles – Driving Tax Free

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Today the surge in fuel prices has started a trend in improving mileage and adopting alternative fuels as well as driving consumers to gas-electric hybrids and soon fully electric vehicles.  What’s more interesting about this trend is the current hidden benefits associated with the movement to electricity as an energy source for transportation.  Let’s take a look at an example of a hidden benefit that early adopters of electric vehicles will enjoy - but probably not forever...

First, let’s take a look at taxation on motor vehicles.  The gasoline tax began in 1932 when Congress placed an excise tax on the fuel, but it wasn’t until 1956 that all of the funds collected went to highway spending through the Federal-Aid Highway Act.  Additional taxes have been added by local and state governments totaling about 11% to the price of the fuel.  So roughly US$0.44 of the purchase price of a gallon of gasoline (US$4.00) is taxes. These moneys are used for road improvements, maintenance, public transportation projects, etc. 

So, if vehicle A gets 15 MPG and vehicle B gets 50 MPG, which owner is paying more tax to build roads and maintain the ones we have?  I’m sure you’ve guessed... the owner of the lower mileage vehicle.  That gas guzzler you’re driving is costing you more in tax than if you drove a compact car.  If both vehicles are driven 15,000 miles per year, then the owner of vehicle A will pay US$440 in taxes and the owner of vehicle B will only pay US$132 which is less than one third as much.

OK, so you might say, "big deal- the less efficient car is probably larger and does more damage to the road so they should pay more".  I might buy that, but here’s another scenario.  What if vehicle A gets 30 MPG and the vehicle B is a plug-in hybrid that gets 200 MPG.  Both vehicles weigh the same and are about the same size - now which owner gets a tax break? Obviously, the gas-electric hybrid owner does.  They will only pay US$33 versus the owner of the gas powered vehicle who will pay US$220. 

Now what happens when your vehicle doesn’t use gasoline at all?  A fully electric car that is plugged into your home outlet every night is not (currently) taxed at all.  You would drive on non-toll roads effectively for free - no tax.  Now the question is, should the government leave it that way for the near future to help convert people to gas-electric hybrids and fully electric cars?  In an earlier post I talked about the future of fully electric automobiles (see: A Case Study of Electric Vehicles).  In that study, I also noted that the cost of ownership is far less for electric cars than for gasoline powered vehicles.  Once a practical electric vehicle (i.e. reasonable cost, 400+ miles to the charge, good size, no battery replacement, etc.) reaches the market, more people will begin to migrate. 

In an electric vehicle economy, the question then becomes who carries the burden of road maintenance and construction?  Could you tax the electricity used to charge the car?  The power company simply adds an additional "vehicle" tax to your power bill... but what portion of your electric bill is for charging your car?  What if you live in an apartment and drive 90 miles each day to work and your friend lives in a 5000 square foot home and drives 3 miles to work?  I would guess that taxing electricity directly would not be very equitable.  And what if your house was powered by solar power or the car itself had solar panels in the roof that charged it up any time it’s in sunlight?  Now, how do you tax it?  You could add an "ad valorem" tax (i.e. a tax based on the car’s value) to the license tag.  Now electric vehicles costing more than a conventional car would pay more.  This still does not address the usage tax which gasoline taxes provide.

In an electric vehicle future there is the possibility that the license tag itself will keep track of mileage for you.  Once a day it will report your mileage on public roads as you drive by readers in the road-way and you’ll get a tax bill either at the end of the month or once a year (similar to a property tax bill).  This would fairly tax each vehicle based on usage and allow any source of energy to charge it.  It would also provide an incentive to drive less - possibly telecommute more and in the process save energy.  Today, modern toll roads use electronic passes to collect tolls - this method could simply be an extension of the current technology.  Maybe fully electric vehicles will have this function built in when you buy it...

So, for now get your electric or gas-electric hybrid and cash in on your tax break while it lasts... there will be interesting times ahead for sure! Let me know what you think?  Till next time...


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Tax free is a great initiative!

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